The layman’s guide to the A330Neo – While the big story from this week is this: Etihad beware the mighty low costs!

Dino D'Amore
By Dino D'Amore March 27, 2014 21:23

The layman’s guide to the A330Neo – While the big story from this week is this: Etihad beware the mighty low costs!

Credible information reaches these offices that while Airbus is in talks with A330 investors to ensure the price point of any A330Neo aircraft is significantly higher than the current A330 offerings, the manufacturer is also closing-in on launch agreements with airlines at prices that are, shall we say, not a great deal higher than current A330 prices, or at least not high enough. As mentioned previously, Airbus is between a rock and a hard place in that it needs to price any A330Neo competitively against the 787-800, which it cannot leave unchecked as is the case right now. At the same time Airbus will not wish to pulverise current A330 investor residual value forecasts. Thus the middle ground is clear, post a premium list price that assists current A330 investors while at the same time offering those very same investors significant discounts on the A330Neo first runs to compensate. After all is said and done, that is no different from any other aircraft launch and certainly pales against all the price and refund haggling on the early run 787-800s that ended up with some prices paid so very far from published list prices it was embarrassing…….and most profitable for some lessors.

The view here, and of our contacts, is that while updating the A330 will certainly appeal to operators it is worth noting that the 10 A333 aircraft for Delta Air Lines with increased MTW and operational centre aux tanks will cost Airbus a great deal of money in engineering costs. This is not a worry if it is, say, bolted on to a 100 A321 aircraft order, but it is otherwise a waste of time unless thoughts are to convert those orders into A330Neo type designs that can lay the foundations for more orders, and moreover, justify the huge cost at the same time as the A350 is starting to rollout.

As a comparison; the A350-800 is at least 10,000 pounds lighter with better aerodynamics than the A330Neo,which will never really be able to match if re-engined and design tweaked in the same manner as the A320Neo. So one wonders and worries about just how much room Airbus and its investors in products have to price an A330Neo between a 787-800 and A330-300. I would argue that if the A330Neo goes ahead as a driver for market share for Airbus then A330-300 order conversions will come with it, protecting some while others with A330-300s will, unless they too are ordering A330Neos at reduced cost, lose out in the long run on residuals. So Airbus is on a guaranteed winner if the designs are good. This is the sheer logic behind aircraft manufacturer thinking that cannot be argued with.

Meanwhile, the Indian Competition Appellate Tribunal (Compat) has rejected an appeal by Jitendra Bhargava, a former executive director at Air India, who complained that the Competition Commission had cleared the merger between the Etihad and Jet Airways without a detailed assessment. Compat rejected his petition for lacking locus standi. Jet Airways needs Etihad and this will help, but it is not the end of the regulatory saga. At the same time Indian regulators extended the deadline for raising working capital via external commercial borrowings by domestic airlines to March 2015 from December 2013. On the news shares in Jet Airways (India) Ltd gained 1.4% while SpiceJet Ltd gained 3.8%.

Etihad is at this time looking towards increasing its stake in Aer Lingus after boosting its stake to over 4% this month. The Etihad roadshows continue to give the message that the airline plans to raise $2 billion to pay for aircraft deliveries this year to finance its fleet deliveries of 18 aircraft which will include its first A380 and787 types. Over the past decade Etihad has raised some $8bn from 68 institutions to finance aircraft and engine deliveries and there is no doubt that the airline will obtain the funds on very good terms in this market.

But all eyes remain fixed on that other possible risky venture for Etihad – the decision on whether to take a stake in Alitalia. Talks are ongoing on a 40% stake sale to Etihad. Will Etihad take on a heavily unionized political football laden with $1.10bn of debt that is rising in the face of stiff low-cost competition?

The Italian minister in charge told the Senate previously that a decision on the deal will be made by March 31. Will the Italians agree to lay off 3,000 Alitalia employees and agree to Etihad having control over the airline? If they do and the deal goes through then the logic is clear for Etihad: Air Berlin should merge with Alitalia and this might be a merger too far for the Italian government.

Meanwhile Air Berlin is in talks for another recapitalisation to strengthen its finances, as it announced it was postponing publication of its annual results (again).”The company is continuing its discussions on those measures with certain shareholders and finance providers,” an Air Berlin statement read.

Air Berlin, last week stated it was in advanced talks that would have a substantial impact on its future, which could mean Etihad taking a larger stake. It is unlikely that the Sabanci family, which owns a 12% stake, will want to throw more money into the Air Berlin cash grinder.

Analysts expect Air Berlin to show a 2013 operating loss of around €120m as the airline is being crushed under the combined weight of IAG/Vueling (which is by the way blazing a trail far exceeding all expectations) and the mighty EasyJet and Ryanair. It would not be a surprise at all if, sensing weakness, NAS hastens expansion onto choice Air Berlin routes so that it may attempt a breakout from Scandinavia to underpin its model – the opportunity exists that is for sure and the airline should take it.

So the bottom line is this: Etihad is at this time throwing money with its European investments and Indian investments directly into airlines at war with far more powerful low-cost operators. What Etihad has achieved is fantastic – don’t get me wrong, it is feeding its hub and the additional traffic from investments is showing. But it is well worth noting that further Air Berlin investment and an investment in Alitalia would come at a time when EasyJet, Ryanair and Vueling are all targeting the same and thus, as is already likely the case with Air Berlin, the Etihad drive for market share will not be without significant cash drains from time to time unless it secures a position of complete control.

Also it is true to mention that Air Berlin shares are hugely inflated at this time as speculators have been buying-in with the hope that Etihad will be forced to buy them out soon at a premium to a point where Air Berlin shares have gained 23% so far this year alone.

The Etihad airline network is one risky bet and even the might of Etihad will be no defence against the combined weight of political and regulatory headwinds, huge cash deficits and a full-on fight against very strong low cost carriers who can keep their ticket prices lower and their margins higher at all times. This is the big developing European airline story of 2014 thus far.

As a footnote to this rather long editorial, it is well worth mentioning that Etihad Airways now has the requisite government and regulatory approvals, consent and permissions sanctioning the strategic partnership between it and Air Serbia. In the agreement Etihad has agreed to provide funding to JAT/Air Serbia of up to $100m through a combination of equity, debt and other financial facilities and/or funding arrangements as may be mutually agreed. In addition, the draft agreement states that Etihad will further invest $14m into Air Serbia in instalments every year for the next three years. Additional grants will also be provided, amounting to $22m by the end of 2014 and another $18m by the end of 2015. This is a fine deal for the Serbian government; if Etihad can make it work for its global operations, then it will have been an exceptional turn of events indeed.

Dino D'Amore
By Dino D'Amore March 27, 2014 21:23
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